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Assignment 2: Financial Project
Due Week 7 and worth 55 points
Five (5) years ago, you bought a house for $171,000, with a down payment of $30,000, which meant you took out a loan for $141,000. Your interest rate was 5.75% fixed. You would like to pay more on your loan. You check your bank statement and find the following information:
Escrow payment
$261.13
Principle and Interest payment
$822.84
Total Payment
$1,083.97
Current Loan Balance
$130,794.68
Write a one to two (1-2) page paper in which you address the following:
Part 1
With your current loan, explain how much additional money you would need to add to your monthly payment to pay off your loan in 20 years instead of 25. Decide whether or not it would be reasonable to do this if you currently meet your monthly expenses with less than $100 left over.
(a) Explain your strategy for solving the problem.
(b) Present a step-by-step solution of the problem.
(c) Clearly state your answer to Part 1. What is your decision?
Part 2
Identify the highest interest rate you could refinance at in order to pay the current balance off in 20 years and determine the interest rate, to the nearest quarter point, that would require a monthly total payment that is less than your current total payment. The interest rate that you qualify for will depend, in part, on your credit rating. Also, refinancing costs you $2,000 up front in closing costs.
(a) Explain your strategy for solving the problem.
(b) Present a step-by-step solution of the problem.
(c) Clearly state your answer to Part 2. What is your decision?
Your assignment must follow these formatting requirements:
Be typed, double spaced, using Times New Roman font (size 12), with one-inch margins on all sides; citations and references must follow APA or school-specific format. Check with your professor for any additional instructions.
Include a cover page containing the title of the assignment, the student’s name, the professor’s name, the course title, and the date. The cover page and the reference page are not included in the required assignment page length.
The specific course learning outcomes associated with this assignment are:
Apply finance formulas and logarithms to amortize loans and calculate interest.
Use technology and information resources to research issues in algebra.
Write clearly and concisely about algebra using proper writing mechanics.
So -- what is your question?
no
To solve this problem, you will need to use some basic principles of finance and algebra. Here is an explanation of how to solve each part of the problem:
Part 1:
(a) The first step is to calculate the monthly payment that would allow you to pay off the loan in 20 years instead of 25. To do this, you can use the mortgage payment formula:
Payment = Loan amount * (Interest rate / (1 - (1 + interest rate) ^ -n))
where:
- Loan amount is the current loan balance
- Interest rate is the annual interest rate divided by 12 to get the monthly rate
- n is the number of monthly payments (20 years * 12 months/year)
(b) Plug in the values into the formula and calculate the monthly payment.
(c) Next, compare the new monthly payment to your current monthly expenses. If you currently have less than $100 left over after meeting your monthly expenses, it may not be reasonable to add the additional amount to your monthly payment.
Part 2:
(a) To determine the highest interest rate you could refinance at to pay off the current balance in 20 years, you need to find the interest rate that results in a monthly total payment that is less than your current total payment. You can start by assuming a certain interest rate and use the mortgage payment formula again to calculate the new monthly payment.
(b) Repeat the calculation for different interest rates, gradually increasing them, until you find the highest rate that results in a lower monthly payment.
(c) Finally, consider any closing costs associated with refinancing. If the new interest rate allows for a lower monthly payment even after considering the closing costs, it may be a good decision to refinance.
Remember to include detailed explanations and step-by-step solutions for each part of the problem in your one to two-page paper. Format your paper according to the APA guidelines provided, and include a cover page with the required information.